Yellen: Fed Policy Could Shift With Economic Change

Federal Reserve Board Chairwoman Janet Yellen told House lawmakers Tuesday in her prepared remarks that she expects a great deal of continuity in the Federal Open Market Committee’s approach to monetary policy.

However, Yellen conceded during the question and answer session with lawmakers that the Fed would pause its tapering of asset purchases if there was a notable change in the economic outlook, and increase asset purchases again if there were “a significant deterioration in the outlook — either for the job market or if inflation would not be moving back up over time.”

While receiving mostly congratulations from the lawmakers in taking her new post, Rep. Jeb Hensarling (R-Texas) chairman of the committee, reminded Yellen of his committee’s yearlong examination of the Fed via its Federal Reserve Centennial Oversight Project.

“Any agency or bureau of government that is 100 years old probably needs a good check-up, especially one as powerful as yours,” Hensarling said. “And I remind all, independence and accountability are not mutually exclusive concepts.”

In her first report on monetary policy, Yellen told members of the House Financial Services Committee Tuesday that“If incoming information broadly supports the committee’s expectation of ongoing improvement in labor market conditions and inflation moving back toward its longer-run objective, the committee will likely reduce the pace of asset purchases in further measured steps at future meetings.”

She then took a line from her predecessor, Ben Bernanke, in his last speech by stating that purchases are not on a preset course and that “the committee’s decisions about their pace will remain contingent on its outlook for the labor market and inflation as well as its assessment of the likely efficacy and costs of such purchases.”

At his last press conference in early January, Bernanke said after the December FOMC meeting that further tapering will be data dependent. However, he said he anticipated that the Fed would probably do a measured reduction at each meeting in 2014.

Jim O'Sullivan, chief U.S. economist at High Frequency Economics, said that Yellen "expressed cautious optimism about growth, with no sign of concern about some of the weaker data recently while downplaying the volatility in markets."

Indeed, Axel Merk, president and CIO of Merk Investments LLC, noted in his Tuesday commentary that on Yellen's first day on the job, the Dow Jones Industrial Average dropped 326 points; 10-year Treasury yields fell to 2.58%.

"While a day does not set a trend, let alone create a legacy, there is no honeymoon for Janet Yellen," Merk said. "Volatility, seemingly absent in 2013, is back, with major implications for investors’ portfolios."

While Yellen expressed disappointment with the past two jobs reports, she said that “we can’t jump to conclusions” about what those reports mean — noting that cold winter weather was likely a contributing factor.

She added that the FOMC would look at a “broad range of data” at its March meeting to assess the significance of the jobs reports. “We’re not back to maximum employment,” Yellen said. “However, there has been substantial job creation. But we have further to go.”

The unemployment rate has fallen “nearly a percentage point since the middle of last year and 1-1/2 percentage points since the beginning of the current asset purchase program,” she said. It was 6.6% in January.

“Nevertheless, the recovery in the labor market is far from complete,” with the unemployment rate “still well above levels that FOMC participants estimate is consistent with maximum sustainable employment.”

Yellen summed up her remarks by stating: “Since the financial crisis and the depths of the recession, substantial progress has been made in restoring the economy to health and in strengthening the financial system. Still, there is more to do. Too many Americans remain unemployed, inflation remains below our longer-run objective, and the work of making the financial system more robust has not yet been completed.”

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